2014 Investing Forecast

The 2014 investing forecast might be best described as “partly cloudy.”

Last year was an abnormally good year in anyone’s book. The Standard & Poor’s 500 index showed that US equities advanced by about 30%. (Source) This number is the highest ascent since way back in 1997. Things were so good, in fact, a record 93 percent of stocks finished higher on the year than the previous 12 months. Further, there wasn’t a whole lot of drama last year, as evidenced by the fact that the S&P never traded below its 200-day moving average at any time during the year.

What makes this all the more astonishing is that this happened during a time when gold, preferred stocks, bonds, real estate investment trusts and the like finished worse off in 2013 than they were the year previous. (Source)

So why, then, do I say the outlook is “partly cloudy” when all these stats point to clear skies ahead? In the world of finance, “recency bias” (or expecting something that’s happened recently to continue) is dangerous.

History suggests those who go all-in based on recent performance have ended up disappointed. Morningstar’s 2009 data showed that during 2000 to 2009, the average investor’s return on all funds was 1.68%, compared to a 3.18% return for the actual funds. What was the difference? Basically, catching the wave too late, and their bad timing led to the investors constantly looking for the next big thing – and finding it only after its trendiness waned.

When 2007 ended, it marked the fifth consecutive year for annual gains, and by that time many investors were not shy about equity investment. However, in 2008 the S&P went down 37 points, a dip so severe that many were concerned we could be headed for a depression.

Today’s world is much the same. We have had five consecutive years of growth, and many will be tempted to throw their hat in the ring with the expectation of making big money.

Before you proceed, look at what you’ve done in the past. If your history shows too-high buys and too-low sells, you might be someone susceptible to getting the “recency bias” blues. Additionally, don’t get too excited over short-term performance. Instead, partner with your financial professional and formulate a plan – then stick with it, refusing to let your emotions take control – so your 2014 investing forecast will be as sunny as possible.